user authentication question

I am having trouble understanding the relationship between passwords in the
"passwd" flat file and the system table pg_user. It seems that if I don't
perform a sql "create user" with the "with password" option I can't connect
to the database when I use password authentication even though I used the
pg_passwd command to enter the user. Also pardon my ignorance but is there
a secure way to enter the password using the "create user" command without
exposing the password? I hate to expose a set of "canned" passwords that I
wanted to enter using a script when installing the database.

Thanks in advance.

Jeff